Weakening rupee? Buy gold for the short-term

If there is turmoil in currencies, gold can shoot up sharply, says author of Arora Report.

US-based Nigam Arora is a financial markets expert, forecasting trends by using algorithms. The Arora Report he authors is widely followed.

Here he talks to Rajesh Bhayani on the outlook for gold prices and allied subjects.

Gold prices have risen from November's lows. Why and what is your outlook in the near and medium term?

There were three reasons behind gold's up-move.

First, whiffs of inflation in the wind. At The Arora Report, we monitor economic data from 23 countries. This is showing early signs of potentially higher inflation down the road. Gold benefits from inflation. This is a long-term support for gold (the price).

Second, gold was very oversold after (new US President Donald) Trump's election. The recent bounce has been partly the result of a natural bounce from the oversold condition.

Third, there is fear that Trump would start a trade war. Gold is being bought as a hedge for stock portfolios.

Has gold regained its safe-haven status and would the rally seen in recent weeks be followed with physical demand? Or is it only a speculative rally?

No, gold has not regained big time safe-haven status. The physical demand continues to be weak. The odds are that the present rally is a speculative one.

However, if Trump says anything that causes turmoil in currencies, gold can quickly shoot up $200 (an ounce).

What are the technical indicators for gold prices?

The overbought condition in the short term has been relieved. So, this source of technical buying is behind us.

In the medium term, gold is showing all signs of going down. The first resistance zone is $1,222 to $1,227 (an oz). The first support zone is $1,100 to $1,188.

How do you see gold performing when the world's two major consumers (of the metal) are India, where demand is low, especially after demonetisation, and China, which is restricting gold import?

Gold is at an inflection point. Currencies are in the catbird seat (meaning an enviable position). If there is turmoil in currencies, gold can shoot up sharply.

On the other hand, if currencies become stable, expect gold to drift down and break the recent low.

Your advice for playing on gold in India?

The rupee is a managed currency. Keep a close eye on the dollar-yen relationship and the dollar-yuan.

If the rupee starts weakening, those in India may consider aggressively buying gold for the short term.

The impact of rising bond yields in America on gold?

In the short term, bond yields have overshot and are likely to retrace some of their recent gains.

In the long term, these are likely to go much higher.

By itself, lower bond yields are good for gold and higher bond yields are bad.

However, investors should look at bond yields in relation to inflation expectations, to determine the impact of the former on gold.

As an example, if bond yields go higher but inflation rises faster than these, it will be good for gold and vice versa.

Photograph: Ajay Verma/Reuters.